California voters will decide the fate of Proposition 40, a new wealth tax, in November 2026. The initiative would enact a one-time tax of five percent on the accumulated wealth of taxpayers and trusts with covered assets valued over $1 billion.
As popular as such “soak the rich” policies might be in some quarters, governments imposing such wealth taxes have found highly mixed returns from the policies, the Organization for Economic Co-operation and Development says.
Proponents of such taxes might tout the equity benefits. Critics might point out that high-net-worth individuals can, and do, simply move to avoid the taxes.
But there are other issues, including the reality that wealth taxes often raise less revenue than expected, while imposing disproportionate economic and administrative costs.
And such laws, where they have been imposed, are being repealed. In 1990, 12 OECD countries had such taxes. By 2017 there were just four OECD countries that continued to do so.
The OECD report notes that many countries repealed wealth taxes because they:
generated relatively little revenue
were expensive to administer
encouraged avoidance
were perceived as economically inefficient
often failed to achieve redistribution objectives as intended.
So migration of taxpayers is one of several objections to such taxes, which increasingly are possible when assets are internationally diversified, which increasingly is the case for such high-net-worth persons.
Migration was rarely the official reason cited by governments which repealed such taxes. The OECD notes that wealth taxes typically produced surprisingly small amounts of revenue compared with expectations.
OECD does not say such policies can never work. “For instance, a net wealth tax may have more limited distortive effects and be more justified as a way to enhance progressivity in countries where the taxation of personal capital income is comparatively low,” the report says.
“Overall, the report concludes that from both an efficiency and equity perspective, there are limited arguments for having a net wealth tax in addition to broad-based personal capital income taxes and well-designed inheritance and gift taxes,” the authors note.
Considerations of equity benefits aside, one of the strongest criticisms of such taxes is their modest fiscal yield, as they generate small returns:
usually well under one percent of gross domestic product
generally a small share of total tax revenue;
often lower than expected because of exemptions, avoidance, valuation challenges, and migration.
The OECD repeatedly notes that low revenue was a major reason countries abandoned these taxes. In other words, the policies generally do not work.
But the persistence of wealth taxes in countries such as Switzerland, Norway and Spain also shows that outcomes depend heavily on policy design, tax rates, exemptions, and the broader tax system, rather than on the mere existence of a wealth tax, the report suggests.
It is unclear whether the California measure would produce meaningful revenue or not, but the key point is that, with all public policy, having good intentions is one thing.
But that matters less than actual good outcomes. Some of us are likely doubtful the measure’s actual stated goals can be achieved, in practice.
So it is in the category of actions we might say are mostly theatrical and symbolic. To the extent the measure would encourage migration out of the state, which would tend to lower tax receipts, the measure might even be counter productive.
